E-Cigarettes Maker Models Supply Chain on Electronics Industry

VMR Products LLC, a leading manufacturer of electronic cigarettes, is taking cues on supply chain management from consumer electronics manufacturers like Apple Inc.

The Miami-based company, which has relied on third-party firms to buy materials and manufacture its products in China, is moving much of its supply chain in house. VMR aims to produce 60% of its “e-cigs” in its own factory in Shenzhen by the end of the year, up from about 30% currently, said Jan Verleur, VMR’s chief executive and founder.

Mr. Verleur said the company, which says it is the largest online e-cigarette seller by sales volume, was inspired to switch to in-house manufacturing by the success of Apple Inc., which began producing iPhones using a similar model years ago. Mr. Verleur said VMR will have an easier time controlling for quality when it relies less on outside suppliers. VMR’s devices turn chemicals called “e-liquid” into vapor, which a smoker then inhales. Defects can take the form of a bad batch of chemicals or flaws in the devices themselves.

“Apple is the greatest example of supply-chain management in China. They have such a low defect rate because the equipment that sits on the Foxconn line…is owned by Apple, not Foxconn,” Mr. Verleur said, referring to the company that provides manufacturing labor to produce iPhones in China. “That’s what we’ve been evolving into. We went from a very sophisticated technical buyer to a very sophisticated manufacturer.”

Many e-cigarette companies are focused on quality control now because the U.S. Food and Drug Administration is widely expected to begin regulating the industry in coming years. The FDA issued preliminary rules prohibiting sales of e-cigs to minors and requiring manufacturers to submit products for approval in April 2014, and a final rule is expected this summer.

Privately-held VMR sells e-cigarettes under the V2, V2 Pro and Vapor Couture brands. It generates about $100 million a year in revenue, according to a person familiar with the company.

Founded in 2007, VMR initially outsourced component purchasing for its electronic devices to third-party Chinese suppliers. This model is common among e-cigarette producers, which often serve primarily as marketing and sales companies whose key asset is the intellectual property behind the designs of their vaporizers.

But the company was plagued by high defect rates. Quality control was costing hundreds of thousands of dollars a month, a dangerously large sum for a company in the early stages of development, Mr. Verleur said.

“When we entered the industry, the products were horrific,” Mr. Verleur said. “There was more than a one in three chance, basically, that the e-cigarette product you were buying was defective, that it would spill e-liquid into your mouth, or have some other problem.”

VMR opened a factory in Shenzhen in 2012, and opened its China headquarters in the city’s Futian District. By the end of 2012, it had opened a quality control center there as well.

The company provides customers with access to quality control reports on individual e-liquid refill cartridges. By entering the batch number on VMR’s website, customers can pull up a report showing levels of nicotine, filler materials and nitrosamines, chemical compounds that have been linked to cancer.